If I told you about a stock that listed publicly in 2014, then hit an all-time high price of $93.85 in that same year, but now trades at just $5.25, you'd probably think what follows is a cautionary tale.
But that's not the case. In fact, I'm going to make the argument for why you should consider buying shares of GoPro (GPRO 1.44%), the subject of the above scenario, and the industry leader in action cameras and accessories.
While it has always been a niche, one-dimensional business for GoPro, the company is expanding its addressable market by adding new camera variations. But it's also building a portfolio of subscription-based software products that can be used by customers who don't even own a GoPro.
Here's why that could transform the company and its stock price this year (and beyond).
NASDAQ: GPRO
Key Data Points
Where GoPro has been, and where it's going
GoPro stock has had a tough time since 2014 because its camera business struggled to grow. Sure, it continued to improve its product each year to remain at the top of the industry, but action sports enthusiasts are a limited market, especially since smartphones burst onto the scene with powerful camera technology.
Plus, the company has historically relied on large retail chains to sell its products, which left it disconnected from its very loyal customer base. That's one area it has improved more recently; it now also sells directly to the consumer through its GoPro.com website. Once GoPro's full-year 2022 results are officially in the books, it expects that the direct-to-consumer channel will have accounted for about 35% of total sales. That figure continues to climb, and it offers some powerful benefits.
First, all of the profits from a product sold on GoPro.com go straight into GoPro's pocket, because it doesn't have to sacrifice a cut to the retailer. Second, it gives the company a direct line of communication with its customers so it can upsell them and keep them informed about new products.
That's really important, because GoPro recently expanded its flagship Hero camera from one model to three. Plus, it continues to build new revenue streams through software subscriptions. With the ability to push these updates straight to its customers, it can increase uptake speed and generate more revenue.
Subscriptions could transform GoPro
Let's talk about subscriptions, because it's an entirely new business for GoPro, and it carries a gross profit margin of between 70% and 80%, which is double the margin of its camera hardware business.
The GoPro.com subscription is the company's big winner in this area. Customers can pay $49.99 per year to unlock exclusive product discounts, unlimited cloud storage for their videos, and the ability to livestream content directly from their GoPro camera.
As of the third quarter of 2022, there were 2.1 million GoPro.com subscribers. Over the last four quarters, they've contributed $75.6 million of revenue to GoPro, which makes up just 6.5% of the company's total revenue of $1.1 billion.
But given the recent quarterly growth rate of 55% (year over year), subscription revenue is increasing so rapidly that it'll likely become a critical part of GoPro's business in the near future.
Data source: GoPro.
Then there is the Quik subscription, which is priced at $9.99 annually. Quik is a mobile app designed to deliver more editing tools and better performance than a typical smartphone's native camera app. It has accumulated a user base of 282,000 so far, generating about $2.8 million in annual recurring revenue.
But Quik lays the groundwork for the new desktop video-editing software GoPro is set to release in 2023. These products expand the company's addressable market from enthusiasts of action sports to, well, anybody who uses content editing tools.
What these changes mean for GoPro
First, it's important to acknowledge that GoPro's total revenue growth remains mostly stagnant. Despite powerful growth rates in its new subscription segments, they're not large enough to move the needle just yet. However, a lift in sales might come from the expansion of its camera product line, though the benefits might not be visible for a couple more quarters.
Plus, like many other consumer products companies, GoPro is grappling with tough economic conditions where high inflation and rising interest rates have constrained household finances. That means consumers have less money to spend on discretionary items like action cameras.
Profitability, however, is a different story. GoPro has generated $125 million in net income over the last four quarters, but consider this: it expects subscription revenue to top $100 million in 2023, and with a gross profit margin of 70% to 80%, a large portion of that could flow to the company's bottom line. So while overall revenue growth might remain slow for the next year or two, GoPro should emerge as a significantly more profitable business.
GoPro stock trades at a price-to-earnings (P/E) ratio of 6.8 based on its trailing-12-month earnings per share of $0.77. For context, the Nasdaq-100 technology index trades at a P/E multiple of 23.4, which implies GoPro stock would have to triple just to trade in line with the broader market.
There's no guarantee that will happen until the company can ignite its overall revenue growth, but given its current profitability and potential, buying the stock at the current price offers a great risk-to-reward scenario.
